Ontario’s deteriorating fiscal situation is an overarching problem for the province, as well as a cautionary tale for the federal government, its new BFF. Right-wing ideology or partisan politics have nothing to do with the irrefutable conclusion that Ontario is in fiscal trouble. This is a challenge for the country as a whole, since Canada cannot reach its potential when its biggest province is languishing and too many other provinces are following the same path of fiscal imprudence.

Admittedly, the Ontario government is confronting large challenges, some intractable. They include an aging population, a fragile and slow-growth global economy, uncompetitive energy costs, a manufacturing sector brutalized by the Great Recession, the disappearance of companies that makes more problematic a recovery based on a lower dollar and American economic resurgence and stubbornly poor productivity growth. However, Ontario is still relatively wealthy and diversified and, in any event, the responsibility of government is to respond constructively to challenges. Unfortunately, current policies are making a difficult situation much worse.

I doubt many Ontarians realize how much they are paying just in interest on the provincial debt. It averages $840 per person every year and rising

The numbers tell the story. Ontario is the largest sub-national debtor in the entire world, just one alarming distinction. Its debt is more than twice that of California, a state with three times the population and one that has its own severe fiscal problems. Its debt is $294 billion, or over $21,000 per capita. Net debt to GDP is up 48 per cent in the past 10 years to almost 40 per cent, second only to Quebec. Last year’s interest obligations totalled $11.4 billion, about the same as the cost of community and social services. I doubt many Ontarians realize how much they are paying just in interest on the provincial debt. It averages $840 per person every year and rising. Not surprisingly, Standard and Poor’s downgraded Ontario’s bond credit from AA- to A+, citing a very high debt burden and very weak budgetary performance

The province’s plight cannot be blamed on the previous federal government, which increased transfers to Ontario by 88 per cent since 2006 (compared to an average of 62 per cent to all provinces). Health care, most people’s number one concern, was up 70 per cent, but the Province did not spend all the money it received for health care on health care. As an Ontario resident, I take no pleasure that my province receives equalization payments from the federal government because it became a ‘have not” province in 2009. What a change from when, out of pride, Premier Bill Davis declined equalization between 1977 and 1982.

Still, since 2009 Ontario has been complaining loudly it received too little, at least until the Liberals took power in Ottawa.

Some of its biggest problems are self-inflicted. Recently, we received a stunning revelation from Bonnie Lysyk, the province’s Auditor-General. In the past eight years, electricity cost $37 billion above market price. Even more staggering, it will pay a further $132 billion above market by 2032. The by-now infamous Green Energy Act guaranteed the price for wind and solar, so that they cost double and 3.5 times the U.S. market price respectively. As a result, energy costs have skyrocketed by 70 per cent, a regressive tax that hurts lower income earners disproportionately and depresses personal consumption. Higher energy costs also render businesses less competitive, which discourages job-creating capital investment.

One can only imagine if the premier had tried to charge taxpayers the cost of a $16 glass of orange juice. If past is prologue, that would have caught the public’s attention. People remember the little things. Billions are apparently too large to relate to, as in gas plants or eHealth scandals. But surely tens of billions will elicit wide-spread alarm, or do we have to wait for $100 billion in waste before outrage finally sets in?

Ontario represents 36 per cent of the national economy, so its deteriorating fiscal situation has national implications. Unfortunately, seven other provinces are contributing to the problem by also forecasting deficits. Provincial debt has increased by 80 per cent in the past 10 years, with Ontario accounting for half the total.

The Fraser Institute drew attention to economic studies demonstrating that government debt has an adverse impact on economic growth, confirming anecdotal evidence around the world. Furthermore, according to the IMF, growth in debt may be more important than its level. That is pertinent for Ontario since its debt has doubled in the past decade.

There is always a political justification for increased spending, including the latest one. We need to invest massively in infrastructure, especially in a period of slow growth and low interest rates. But it is not an either or proposition. We can all agree that investment in infrastructure is crucial. The issue is where to put the pin in the continuum between inadequacy and unaffordability. Let’s not forget that for Keynes deficit spending was for recessions, not periods of growth. As to low interest rates, the initial ¼ per cent hike in the U.S. Federal Funds Rate is only the beginning. Furthermore, the impact on Ontario will be more severe if its credit rating continues to deteriorate.

The rationale for spending is doing something for people now. But a government’s responsibility is not only to its adult population today. It also should consider the intermediate term, as well as the next generation. Granted, infrastructure projects may address long-term needs. However, if the expenditures are beyond our means or diverted to general expenses, then future funding to maintain infrastructure and basic social services will be compromised.

I am concerned that across the country governments have adopted tax and spend policies that are not designed to address a crisis or short-term challenge. Rather, they seem motivated by an interventionist political philosophy. Economic history has demonstrated these policies will end badly. Higher debt ultimately means even higher taxes, reduced social spending, vulnerability to external shocks and an inherited burden for our children.

Higher tax rates drive down consumption and investment which stifles growth and leads to lower tax revenue, which in turn exacerbates the debt problem. And so it goes in a vicious cycle that leads to credit downgrades, loss of investor confidence, job losses and a wake-up call that is both inevitable and painful.

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